Kasich: Raise cigarette taxes to pay for tax cut

COLUMBUS – Gov. John Kasich would pay for a 8.5 percent income tax cut over three years in part by increasing taxes on cigarettes, businesses' revenue and oil and gas obtained by fracking.

The cigarette tax would increase from $1.25 a pack to $1.85 over two years.

Before unveiling a 1,620-page bill that includes proposals for policy and tax changes, Kasich said Ohio needed to get its top income tax bracket under 5 percent to help make the state more attractive. The tax cut he's proposing would help Ohioans from all tax brackets, he said.

"What we have been doing for the last several years is paying off," Kasich said.

The proposals now head to the House of Representatives, where they pose a dilemma for Republicans: Do they give their party's governor what he wants in an election year, including an income tax cut, or do they listen to industries such as oil and gas and tobacco that will likely oppose the plans?

Hard sell to Republicans?

Senate President Keith Faber, R-Celina, told reporters the cigarette tax would be a hard sell among some Republicans, but wouldn't elaborate.

The governor has already clashed with the Legislature over his proposal for a fracking tax. Lawmakers in the House of Representatives killed his proposal last year and have introduced their own version that is more agreeable to the oil and gas industry, which currently effectively pays less than 1 percent in severance taxes.

This time, Kasich called for a 2.75 percent tax on oil and natural gas released through breaking up shale rock, with about 20 percent of the money from the tax going to counties that have fracking and 80 percent paying for income tax cuts. The American Petroleum Institute of Ohio quickly released a statement calling his proposal "unworkable."

Faber said he's open to negotiating over the fracking tax, but Republicans in the Senate have always been more open to the tax than lawmakers in the House.

"I'm for tax reform, as long as tax reform generates an overall smaller tax burden for Ohioans," Faber said.

Another tax increase that GOP-friendly business leaders had avoiding endorsing is Kasich's proposed hike in the commercial activity tax, which businesses pay on their sales within Ohio. The CAT, as it's called, would increase from 0.26 percent to 0.3 percent.

For instance, the Cincinnati USA Regional Chamber supports Kasich's income tax cut proposal, but has concerns about his request for lawmakers to increase the CAT. The group said it will have to study the proposed CAT increase and the income tax cut to make sure that businesses would end up better off in the end.

"Currently, the CAT works well because of its low rate and broad application," said Jason Kershner, who heads the chamber's government affairs, in a statement. "The Chamber is concerned that any increase in the CAT could set a precedent for future increases that would make businesses less competitive."

Democrats: Smoking cessation, not tax cuts

The across-the-board income tax cut would be Kasich's second in two years. Including last year's 10 percent cut, as part of the two-year budget, Ohio's income tax rates have already fallen about 25 percent since 2005. This latest cut would make income tax rates 8.5 percent lower in 2016 than they're currently scheduled to be in 2015.

Democrats have opposed Kasich's income tax cuts, saying they disproportionately benefit wealthy Ohioans, even though they're applied to all of Ohioans' income tax brackets.

Wealthy people pay a larger sum in taxes and will therefore receive a larger amount of money in savings.

Plus, an income tax cut doesn't provide any savings for the poorest of Ohioans, Democrats say. Most Ohioans in the bottom two state income tax brackets – about 768,000 people, or 15 percent of Ohioans who file income tax returns – pay no taxes because of a credit that applies to annual incomes of up to $10,000.

And lower-income Ohioans would feel the increase in cigarette taxes more acutely, Democrats say: They have smaller budgets to begin with, and they're more likely to smoke, said House Minority Leader Tracy Heard, D-Columbus.

"He thinks he's just going to tax people out of a bad habit?" she said.

If the state is going to increase its cigarette tax, all the $848 million the tax generates should go to programs that will help people stop smoking, Heard said – or to another area that will help low- and middle-income Ohioans, such as education or local roads and police forces.

"If he took that money and didn't put it into smoking cessation, what are you going to put it into that's going to impact the same population?" she said. "Everything that I've seen is going into filling the same hole created by tax breaks for the wealthy."

Under Kasich's proposal, all tobacco products, plus currently untaxed e-cigarettes, would be subject to the same tax as cigarettes. Kasich would also allocate $26.9 million for smoking cessation programs. That money comes from a settlement between state attorneys general and the tobacco industry, not from the tax increase.

Extra tax break for lower incomes

Ohioans in the lower income-tax brackets would see two extra tax breaks under Kasich's plan: All Ohioans currently receive a personal tax exemption on $1,700 of their income. Kasich is asking the Legislature to increase the personal exemption to $2,700 for Ohioans who earn less than $40,000 a year and to $2,200 for people who earn $40,000 to $80,000.

In addition, Ohio would increase the Earned Income Tax Credit it created last year, from 5 percent of the federal credit to 15 percent. The credit is only for Ohioans who are already earning enough to pay any income taxes. Like the federal credit, it varies based on income level and number of children, maxing out at a married couple with three or more children that earns $52,427.

About 475,000 Ohioans qualify for the credit. They earned an average tax credit of $141 last year and would earn an average of $225 under the proposed expansion.

"While that might not seem like much to some people, for low-income people the difference between $100 and $300 can mean needed clothes, furniture or medical care," said Philip Cole, executive director of the Ohio Association of Community Action Agencies.

GannettOhio's Russ Zimmer contributed.

How much would you save?

In 2016, when the proposed 8.5 percent tax cut would take effect, here's how much a married couple with two children would save at these income levels:

Earnings

Savings from current 2014 bill

$35,000*

$255

$70,000

$240

$200,000

$745

*Qualifies for the Earned Income Tax Credit. EITC amounts vary widely based on income level, marital status and number of children. The Enquirer used the average EITC in Ohio in figuring this couple's tax bill. See story for details.

Source: Ohio Department of Taxation, Enquirer research

Kasich's proposal goes beyond taxes

The governor's legislation asks lawmakers to pass several new policies, especially related to education. Most of them don't come with additional money from the state, spokesman Jim Lynch said.

Education

Extend vocational options to 7th and 8th graders.

Establish dropout recovery programs for adults ages 22 and older at eligible community colleges and career centers.

Provide $10 million in casino licensing fees for a Community Connectors mentorship program.

Tie two-year colleges' state money to completion rather than enrollment. (This is already the case for money that goes to four-year colleges for undergraduate education.)

Base 50 percent of state money for technical centers on the percentage of students who find jobs.

Allow two-year colleges to offer students a guaranteed tuition rate.

Create a globalization liaison at the Board of Regents to attract and retain international students.

Veterans

Fast-track state licensing and certification, such as for driving a commercial vehicle, for veterans and their spouses.

Grant free college credit to veterans for military training and experience.